Daily Newsletter, Tuesday, 09/04/2007

Table of Contents

Market Wrap

Bullishness Breaking Out All Over

by Jim Brown

Many traders came back to work today but volume was still light. The volume
we did have was bullish and market sentiment was improving almost hourly.
Resistance levels were breaking and volatility deflating but remember it was
still on light volume. Fund manager sentiment rose to 65% thinking the bottom
was behind us compared to only 55% two weeks ago. Is it time to break out the
champagne and party hats?

Dow Chart - Daily

Nasdaq Chart - Daily

The morning economics started off with the Institute of Supply Management (ISM)
report and although it fell for the second consecutive month it was still
positive at 52.9 and the lowest level since March. This was slightly less than
expected and only about a point below the July level at 53.8. Anything over 50
indicates an expanding economy. The drop in the ISM is one more reason the Fed
should consider a rate cut on Sept-18th. Nearly all the components fell 1-2
points but nothing
to indicate an accelerating decline. New orders fell to 55.3
from 57.5 but still well into positive territory. The weakest forward-looking
component was order backlogs, which fell to 50.5 and just over contraction
territory. Supplier deliveries slipped back to 50 and about where they have been
trending for the last six months.

Construction spending fell -0.4% in July and posted the first decline in
spending in six months. The drop was led by a -1.4% decline in residential
construction. The consensus was for a minor +0.1% gain in spending overall. This
report was ignored due to its trailing nature and a drop in residential
construction was definitely no surprise. However, the sudden drop in spending is
one more reason the Fed should cut rates.

Auto sales for August turned in a surprise with GM posting a +5.3% jump in sales
compared to estimates for a drop in sales of -4.9%. GM managed this reversal of
fortunes with a +14% spike in truck sales. GM saw the massive amount of money
Toyota was spending to market their Tundra pickup and GM rushed to increase the
incentives for the Chevrolet and GMC pickup models. Apparently it worked very
well and kept them from taking a beating. Ford was not as proactive and sales
fell -14% in
August. Chrysler posted a sales loss of -6.1% and amazingly Toyota
also posted a loss of -2.8% despite their guidance to become number one in sales
by 2010.

The rest of the week will be dominated by employment reports with the Fed Beige
book another highlight on Wednesday. The employment reports are going to be key
for the Fed since they may show the impact of the credit crunch on the labor
market. The Challenger report on Wednesday will be our first look followed by
the Monster Employment Index on Thursday and the Bureau of Labor Statistics
NonFarm Payrolls on Friday. In an interesting move today Merrill and UBS cut the
employment search
firms including MNST, KFY, HSII, MAN and FCN. Their reasoning
was a sudden drop in employment activity and massive layoffs already announced
and to come in the financial sector. Employment in the credit trading and
structured products business is expected to drop substantially. In New York
alone employment six months ago stood near their post 9/11 highs. With
structured products almost at a standstill and merger and acquisition activity
also greatly reduced there is a strong possibility
there will be some additional
layoffs ahead. How much this has impacted the Friday payroll report is a key
economic the Fed will be watching.

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The Fed and bank regulators sent mortgage banks a message this morning saying
examine all delinquent loans and do everything they can to "preserve home
ownership" rather than foreclose everybody. With the banks already under the gun
with rising defaults they will be mixed about keeping a lot of those loans on
the books as under performing. The urge to refinance people who are already
underwater is slowing since that means increasing the amount of debt on the
books to borrowers
that have already proved they can't make the payments.
Someone said it appeared the Fed was encouraging banks to loan irresponsibly and
this move was only going to prolong the problem. The Federal Home Loan Bank (FHLB)
system reported an unprecedented surge in mortgage borrowings by more than $110
billion in August. That is more than the FHLB normally lends in a full year.
These are advances given to its 8,100 member banks to fund loans. This allows
banks to continue to fund and
originate loans until they can sell them into the
secondary market.

Apple will announce some big changes to the iPod on Wednesday and the rumors are
rampant as to what those changes will be. It is a pretty good guess that the
screen will get bigger along with the onboard storage. There are quite a few
analysts that think the new iPod will look like the current iPhone with the new
screen technology and functionality. Some feel the iPod will morph into an
iPhone without the phone. Others think the new iPod will have WiFi capability
that will allow the
download of songs from any hotspot. Other announcement
rumors include adding the Beatles library to iTunes. This has been a persistent
rumor for the last 18 months or so. Piper Jaffray is bullish on the stock saying
they could announce record sales of more than two million Mac's for the quarter.
That is an astounding number considering the slow pace of growth in the
conventional PC market. AAPL gained +5.68 in anticipation of the announcement.

Home Depot lost $2 after announcing it had completed its $10.7 billion tender
offer for 289 million shares at $37. That represents nearly a -15% of HD stock.
Late in the afternoon S&P announced they were going to reduce HD's weight in the
S&P at the close and that caused selling in HD and buying in the S&P to bring
portfolios back into balance.

CCrude Oil Chart - Daily

Oil prices rose again despite hurricane Felix turning west and making landfall
in Nicaragua and losing strength. It is no longer even a remote danger to the
Gulf oil patch. The reason oil prices soared was due to problems in gasoline
refining and the appearance of a new low pressure area forming off the coast of
Bermuda. Cyclonic trends were being observed and analysts felt this could turn
into a tropical storm very quickly. Until it forms there is no track projection
but coming westward
between Florida and Cuba is always a challenge for the oil
patch. To add to the hurricane hysteria the hurricane forecasters updated their
expectations for the rest of the season and actually raised their estimates for
activity. With two hurricanes and one tropical depression currently in progress
their upgraded forecast carried a little more weight and traders reacted
quickly.

Gasoline led the surge in crude with a spike to just over $2 intraday. Refinery
problems continue to plague the sector with nearly one million barrels of daily
capacity offline. Chevron said the Pascagoula Mississippi refinery capacity
knocked out by a fire several weeks ago will not be back online for 3-4 months,
contrary to earlier reports last week. Shell's Port Arthur TX plant lost its cat
cracker and until that is fixed it represents a serious shortage of gasoline
capacity from
that location. Exxon has the same problem at its Charlotte LA
refinery. Conoco's Phillips Lake refinery is down and Total's Port Arthur
refinery is also crippled. I don't think terrorists could cause as much damage
as we have seen occur over the last two weeks. Fortunately the driving season is
over and gasoline demand is set to drop sharply. This week's inventory report,
on Thursday due to the holiday, will be of special interest once again. However
this perfect storm of refinery outages
and weekly hurricanes will eventually run
their course and we should see crude prices fall even more quickly than they
rose.

Advisory firm Dorsey Wright said today that the market was giving the best buy
signal since Oct-2002. The spokesman said 70% of the S&P had moved into
seriously oversold territory during the crash and 50% had now rebounded into
accumulation mode. Their bullish percentage indicator on the NYSE was now
showing a buy signal that has only occurred 20 times since 1955. Dorsey Wright
has a pretty good record for accuracy but as the spokesman cautioned that does
not prevent another retest
or weakness in individual issues. It is strictly a
market call based on the reversal of the bullish percent indicator. That
indicator takes the number of stocks on the NYSE that are currently giving buy
signals and subtracts those still giving sell signals to arrive at the overall
market signal. If there were 2000 stocks and 1000 were giving buy signals the
bullish percent indicator would be at 50%. Their buy signal occurs when this
bullish percent indicator reverses from oversold
levels and back into
accumulation mode. The Bullish Percent (BPI) had rebounded to near 50% today
from a low near 30% during the recent downdraft. There are 950 stocks on the
NYSE giving buy signals out of the 1944 currently tracked for the BPI. (48.8%))

Will it be a September to remember or full speed ahead? September has
historically been the worst month for the markets. That trend has been slowly
changing in this decade and hopefully that trend will continue. Starting in 2001
the S&P lost -8% in September. The years that followed saw a new trend appear.
2002 saw losses of -11% and 2003 -1.3% but 2004 saw fractional gains of +0.1%,
2005 +0.6% and 2006 +2.5%. Is this trend going to continue or will the old trend
reassert itself?
Obviously nobody knows but more and more analysts are beginning
to bet on market gains this September. The Fed should be acting in favor of the
market but we won't know for sure until 9/18. About the only factor that may
work against us would be the liquidations in hedge funds. Reportedly there are
still quite a few funds that have pending redemptions due by Sept-30th.
According to TrimTabs hedge funds had redemptions of more than $55 billion in
July. Since there is a 30-45 day window
for redemptions those redemption
requests came in May/June and right at the beginning of the subprime problem.
TrimTabs estimates there were even larger redemption requests in July/Aug that
will not be disclosed until the end of September. That could produce at least
some drag on the market and at worst a return to heightened volatility.

When the hedge funds were hit with these massive redemptions they had no choice
but to sell anything liquid. Secondarily the prime brokerages for these funds
were getting hit with collateral valuation problems and they told funds to
deleverage ASAP because their collateral value was crashing. This produced even
more selling. I believe this problem has passed and funds have completed most of
their portfolio adjustments. There is also the coming earnings cycle and
earnings estimates
are beginning to fall sharply, primarily on financials. This
could cause some individual weakness as the current downgrade cycle hits each
stock. Earnings expectations had risen after the strong first half results but
those estimates are beginning to recede. Personally I believe any future dip
will be a buying opportunity rather than a cause for alarm. TrimTabs was on CNBC
again today saying that the insider buyback trend is accelerating with 6 of the
last 10 days showing more insiders
buying than selling. Since sellers are
normally 10:1 over buyers that is a positive trend. TrimTabs also said there
were at least six new buyback announcements on each of the last 28 trading days.
New stock buyback announcements in August totaled $77.4 billion and the highest
month in TrimTabs records. This is definitely bullish but only if companies
follow through on their announcements.

I feel the worst is over for the markets but everyone may not share that view.
The Dow was up +135 at 3:30 but a strong sell program appeared to knock off -45
points right before the close and the selling carried over into the future
markets after the cash close. That was the third consecutive day that sellers
appeared at 30 min before the close. Furthermore as we near the employment
reports later this week and the BSC/LEH earnings on the 13th there could be some
challenges.

The Dow punched through another resistance level at 13381 (100-day average) and
took aim at much stronger resistance well above at 13700. That will be a crucial
test of any September rally since we could easily test it before the LEH/BSC
earnings and Fed meeting. It would be the perfect place to rest while waiting on
the Fed.

TThe Nasdaq hit that same resistance level relative to the Dow when it hit 2635
today. Since it is running ahead of the Dow it will be critical to watch for a
break of that resistance. The Nasdaq lost -15 points in the closing sell off.

The S&P is the laggard of the big three with its rebound to 1490. That 1490
resistance level is the critical level for the S&P for tomorrow. That 1490 level
was within a point or two of the intraday support back on 5/10, 6/7, 6/12, 6/26
and that makes it critical resistance as we move back towards the upside. If we
move back over 1490 and hold it the bulls would be in control again. If we fail
here the bears would come back in force on yet another failed rally. That 1490
level
will be important this week but the really critical level will be 1535.
That was at or near the resistance highs set back on 5/23, 6/04, 6/15 and 7/09.
Just like the four intraday lows set the overhead resistance for this week the
four intraday highs will become critical resistance should we break 1490 this
week.

S&P-500 Chart - Daily

Russell-2000 Chart - Daily

The Russell 2000 broke 800 to the upside intraday just like the S&P and 1490.
The closing sell off pushed both back to their respective levels overnight. I
was all set to pound the table for buying the rally when 800 broke to the upside
at 2:15 but reverted back to cautious when it collapsed at the close. The
Russell futures fell an additional -2 points after the close indicating
additional weakness. I am still planning on being bullish over Russell 800 and I
think that could happen
tomorrow. I actually wanted to revert to a buy the dip
scenario on the Russell but I am not confident enough to pick a number tonight.
This is September and we need to err on the side of caution rather than be
blindly bullish. Continue to maintain a long bias over 800 and a short bias
under 790 but cherry picking good stocks leading the charge also remains an
option.

New Calls

New Puts

New Strangles

Play Updates

In Play Updates and Reviews

by James Brown

Call Updates

Amazon.com - AMZN - close: 82.70 change: +2.79 stop: 77.45

AMZN continued to rally and broke through resistance at the $80.00 mark pretty
early this morning. Our trigger to buy calls was at $80.85 so the play is now
open. If you don't want to chase it here then look for a dip back toward the
$81.50-80.00 zone as a potential entry point. Our target is the $88.00-89.00
range. The P&F chart is very bullish with a $99 target.

Railroad stocks as a group finished higher today. The DJUSRR railroad index rose
1.5%. CP failed to participate. The stock under performed with a 0.7% decline
and a final close under the $70.00 mark, which is short-term bearish. What makes
this more surprising is that CP announced what appeared to be good news with a
five-year contract settlement with the Teamsters in Canada. If CP continues to
dip we'd look for short-term support near the 10-dma around $68.50. A bounce
near $68.50
could be used as a new entry point. Another alternative entry point
would be a rise past today's high at $70.74. Our target initial target is the
$74.75-75.00 range. We do have a wide, aggressive stop due to the stock's recent
volatility. If CP tries to fill the gap from Friday morning look for a dip back
toward $67.75.

CRDN also continued its rally and shares posted a 1.4% gain. The stock's next
challenge is getting past the 50-dma near 74.45 directly overhead. Should CRDN
see any profit taking look for a dip back toward the $71.25-70.00 zone as a
potential entry point. Our target is the $78.00-80.00 range.

ETN tried to breakout over resistance near $95.00 and its 50-dma and did so on
an intraday basis but failed to hold most of its gains. The intraday high was
$95.16. We are suggesting a trigger to buy calls at $95.25. If triggered we will
have two targets. Our first target is the $99.75-100.00 range. Our second target
is the $103.50-104.00 zone. Aggressive traders may want to put their stop loss
under support near $90.00. More conservative traders could put their stop closer
toward
what should be technical support at the 10-dma around $92.50.

Target achieved! Tech stocks were market leaders on Tuesday and IBM hit new
multi-year highs at $118.89. Our initial target was the $118.00-120.00 range.
The stock closed near its July peak and after the current two-week rally we
would be looking for some profit taking here. A dip back into the $116-114 zone
would not be out of the question. We are raising our stop loss to $111.59, just
under the August 28th low. Our second, more-aggressive target is the
$124.00-125.00 zone. FYI: The
Point & Figure is very bullish with a $177 target.

MICC is another tech stock showing a lot of strength today. Shares broke through
resistance near $85.00 and closed up with a 1.7% gain. We were suggesting a
trigger to buy calls at $85.25 so the play is now open. The next hurdle for the
bulls is potential technical resistance at the 50-dma and 100-dma near $86.35.
More conservative traders may want to wait for MICC to clear technical
resistance at its 100-dma and 50-dma near $86.35 first before starting plays. We
have two targets.
Our first target is the $89.75-90.00 range. Our second,
more-aggressive target is the $94.00-95.00 range.

MTW didn't make much progress today. The stock traded lower this morning and had
to fight its way back toward resistance at the $80.00 mark. There was a brief
rally above $80.00 this afternoon but the high was only $80.08. More aggressive
traders may want to buy calls now. We're suggesting a trigger to buy calls at
$80.25. If triggered our target is the $88.00-90.00 range. Nimble traders will
want to try and be patient and look for a dip back into the $78.00-75.00 zone as
a potential
entry point. Conservative traders might want to cinch up their stop
loss toward $75.00. The Point & Figure chart is very bullish with a triple-top
breakout buy signal and a $103 target. FYI: MTW is due to split 2-for-1 on
September 11th.

Oil stocks were mostly higher thanks to a rally in crude oil. Concerns over the
hurricane currently south of the Gulf of Mexico and worries that we will still
see several more big storms this year are pushing crude futures high. Shares of
RIG really move with an intraday high of $109.44. Today's rally is a bullish
breakout over $105 and its 50-dma. If RIG dips back toward the $105.50-105.00
zone we'd use it as a new entry point for calls. The $110 region could be
short-term support
but our target is the $114.00-115.00 range. Please note that
we're raising the stop loss to $102.49, which is under the rising 10-dma.

Traders bought the dip at RVBD's 10-dma this morning and shares surged to an
intraday high of $46.76. The stock closed off its highs but still posted a 3.4%
gain. Tech stocks appear to be in favor right now and networking companies are
getting a lot of positive press. If there is any profit taking look for a dip or
a bounce near $45.00 as a new entry point for bullish positions. Our target is
the $49.40-50.00 range. Today's intraday strength produced a brand new "bearish
signal
reversed" pattern on the P&F chart, which now points to a $65 target.

Put Updates

Acuity Brands - AYI - cls: 53.55 change: +1.01 stop: 56.01

Warning! AYI has produced a bullish reversal-type of pattern with today's
bullish engulfing candlestick. The stock rallied 1.9% but is struggling with
short-term resistance at its 10-dma and the $54.00 level. More conservative
traders may want to tighten their stops toward the $55.00 level. We're not
suggesting new positions at this time. We have two targets. Our first target is
the $47.75-47.50 range. Our second target is the $45.25-45.00 zone.

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call
and an OTM put on the same stock. The strategy is neutral. You do not care what
direction the stock moves as long as the move is big enough to make your
investment profitable.)

---

Diamonds - DIA - cls: 134.34 chg: +0.94 stop: n/a

As the DJIA continues to rally the DIA are trekking higher in its shadow. We do
not see any changes from our previous comments. We are not suggesting new
positions at this time. Our strangle play suggested using the September $137
call (DAZ-IG) and the September $127 put (DAW-UW) with an estimated cost of
$2.05. We want to sell if either option rises to $3.10 or more.

Today's move in the OEX is bullish with its breakout over potential technical
resistance at the 50 and 100-dma. The next hurdle for the bulls is resistance at
the 700 mark. We're not suggesting new positions at this time. Our strangle
suggested using the September 700 call (OEZ-IT) and the September 660 put (OEY-UL)
with an estimated cost of $14.30. We want to sell if either option rises to
$21.45 or more. Considering these prices we probably need to see a move into the
$705-710 range
or the $655-650 zone to be profitable.

Dropped Calls

None

Dropped Puts

None

Dropped Strangles

None

Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.

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